Ninth Circuit Decision Holds That California Law Addressing Mandatory Arbitration Agreements May Go Into Effect

Since the Supreme Court issued its seminal 2018 decision in Epic Systems Corp. v. Lewis, acknowledging that the Federal Arbitration Act (“FAA”) permits the use of arbitration agreements with class action waivers, many employers have implemented arbitration programs for their employees. Those arbitration programs have been aimed, in no small part, at avoiding the class and collective actions that have overwhelmed employers, particularly in California.

In response, California passed AB 51, which prohibits imposing “as a condition of employment, continued employment, or the receipt of any employment-related benefit” the requirement that an individual “waive any right, forum or procedure” available under the California Fair Employment and Housing Act (“FEHA”) and Labor Code.

AB 51 was challenged by several business groups, including the U.S. Chamber of Commerce, as being preempted by the FAA. Shortly before AB 51 was to go into effect, Judge Kimberly Mueller of the United States District Court of the Eastern District of California granted a temporary restraining order (“TRO”) and, subsequently, a preliminary injunction barring enforcement of the statute, concluding that the argument that AB 51 is preempted by the FAA was likely to prevail.

The Ninth Circuit, however, has now reversed on the central issue in United States Chamber of Commerce v. Bonta and opened the door for AB 51 to go into effect. It held that AB 51 “was not preempted by the FAA because it was solely concerned with pre-agreement employer behavior.” (The panel upheld Muller’s determination, however, that AB 51’s enforcement mechanisms – civil and criminal penalties – were preempted by the FAA because they punish employers for entering into an agreement to arbitrate.)

The dissent noted that the majority’s ruling created a split with the First and Fourth Circuits. Those courts have held that “too clever-by-half” workarounds to block the formation of arbitration agreements are preempted by the FAA, just as much as laws that explicitly block their enforcement.

That split suggests that the business groups may not only seek an en banc review of the case, but that they are likely to seek review by the United States Supreme Court. Given the Circuit Court split and the important issues Bonta raises under the FAA, there seems to be a significant chance that the Supreme Court would choose to review it.

And, should it do so, the current composition of the United States Supreme Court suggests that Bonta in fact could be reversed.

Of course, only time will tell whether the business groups seek en banc review or seek certiorari with the Supreme Court. And only time will tell whether AB 51 will be stayed during that time.

We will continue to monitor developments.